TMI Blog2010 (11) TMI 761X X X X Extracts X X X X X X X X Extracts X X X X ..... for educational purposes, the Chief Commissioner cannot be faulted for rejecting the applications seeking approval under section 10(23C)(vi) of the Act- Against assessee. - 21248, 21251, 21266, 2327 of 2010 - - - Dated:- 11-11-2010 - RAO V. V. S., RAMESH RANGANATHAN, JJ. JUDGMENT Ramesh Ranganathan J.- In this batch of writ petitions rejection by the first respondent, of the applications submitted by the petitioners for grant of approval under section 10(23C)(vi) of the Income-tax Act, 1961 (hereinafter called the Act ), is under challenge as being illegal and arbitrary. A consequential direction is sought to the Chief Commissioner of Income-tax to grant approval, under section 10(23C)(vi) of the Act, to the petitioner societies from the year 2009-10 onwards. 2. While Sri K. Vasantkumar, Sri Y. Ratnakar, Sri A. V. Krishna Koundinya, Sri C. V. Narasimham and Sri Ch. Pushyam Kiran put forth their submissions on behalf of the petitioner-societies, the impugned orders were sought to be sustained, on behalf of the Income-tax Department, by Sri J. V. Prasad, learned senior standing counsel. 3. To enable counsel on either side to focus on the issues which arise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year, the society can pursue it in any other year as it has the mandate under the objects mentioned in its trust deed ; such objects of a trust fall foul of the conditions specified in section 10(23C)(vi) ; exemption is granted to a society and not to any limb of a society engaged in a particular activity ; it is, therefore, necessary that all the aims and objects mentioned in the trust deed are exclusively for education, and not for any other purpose ; the clauses in the trust deed should not be ambiguous allowing the society a wide scope to indulge in any other activity which are strictly not for promotion of education ; in its Instruction No. 1112 dated October 29, 1977, the Central Board of Direct Taxes had explicitly prohibited spending of surplus of an educational institution for non-educational purposes ; violation thereof implied that the society did not exist solely for educational purposes ; even if no amount is spent for non-educational purposes, the society would not be entitled for exemption under the Act if its existence is not solely for educational purposes ; the surplus, which societies seeking approval make, should again be ploughed back for educational purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be regarded as an educational institution . (Aditanar Educational Institution v. Addl. CIT [1997] 224 ITR 310 (SC)). Educational institutions, which are registered as a society, would continue to retain their character as such and would be eligible to apply for exemption under section 10(23C)(vi) of the Act. (Pinegrove International Charitable Trust v. Union of India [2010] 327 ITR 73 (P H)). The distinction sought to be made between the society, and the educational institution run by it, does not, therefore, merit acceptance. 9. In order to be eligible for exemption, under section 10(23C)(vi) of the Act, it is necessary that there must exist an educational institution. Secondly, such institution must exist solely for educational purposes and, thirdly, the institution should not exist for the purpose of profit. (CIT v. Sorabji Nusserwanji Parekh [1993] 201 ITR 939 (Guj)). In deciding the character of the recipient of the income, it is necessary to consider the nature of the activities undertaken. If the activity has no co-relation to education, exemption has to be denied. The recipient of the income must have the character of an educational institution to be ascertained from i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e used by the educational institution for the purpose of development of education and expansion of the institution. (T. M. A. Pai Foundation v. State of Karnataka [2002] 8 SCC 481). It is not possible to carry on educational activity in such a way that the expenditure exactly balances the income, and there is no resultant profit. (Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC) ; American Hotel and Lodging Association Educational Institute [2008] 301 ITR 86 (SC) ; Pinegrove International Charitable Trust [2010] 327 ITR 73 (P H)). Profits/surplus cannot be diverted for any other use or purpose, and cannot be used for personal gain or for any other business or enterprise. (Islamic Academy of Education v. State of Karnataka [2003] 6 SCC 697). The test of predominant object of the activity is to be seen, whether it exists solely for education and not to earn profit. (Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC) ; American Hotel and Lodging Association Educational Institute [2008] 301 ITR 86 (SC) ; Pinegrove International Charitable Trust [2010] 327 ITR 73 (P H)). The decisive test is whether, on an overall view of the matter, the object is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch objects has to be deducted from the gross receipts/income. The word wholly in the third proviso refers to the quantum of expenditure and the word exclusively refers to the motive, object or the purpose of expenditure. (Pinegrove International Charitable Trust [2010] 327 ITR 73 (P H)). The third proviso indicates that accumulation of income by an educational institution, governed by sub-clause (vi), is not a disabling factor as long as the purpose of accumulation is the application of the income wholly and exclusively for the purpose of education. (Vanita Vishram Trust [2010] 327 ITR 121 (Bom)). That the third proviso to section 10(23C)(vi) permits investment and deposits, of its surplus, in a fund means that the institution can have deposits on which it may earn interest. (City Montessori School (Regd.) [2009] 315 ITR 48 (All)). 13. It is evident, from the provisos to section 10(23C)(vi), that there is a difference between stipulation of conditions and compliance therewith. (Vanita Vishram Trust [2010] 327 ITR 121 (Bom)). At the initial stage, when an application for exemption is submitted by an educational institution, the scope of inquiry is restricted only to ascerta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thority that the conditions, on which approval was given, are breached or that circumstances mentioned in the thirteenth proviso exists, then the prescribed authority can withdraw the approval earlier given by following the procedure mentioned in that proviso. Stipulation of monitoring conditions is different from compliance with those conditions. Compliance or non-compliance can only be gauged at the assessment stage, as availability of exemption has to be evaluated every year in order to find out whether the institution existed during the relevant year solely for educational purposes, and not for profit. (American Hotel and Lodging Association Educational Institute [2008] 301 ITR 86 (SC) and Vanita Vishram Trust [2010] 327 ITR 121 (Bom)). 16. We, accordingly, hold that in cases where approval, under section 10(23C)(vi) of the Act, is initially sought, the objects in the memorandum of association of a society/trust are conclusive proof of such a trust existing solely as an educational institution entitled for the benefits, and as being eligible for approval, under section 10(23C)(vi) of the Act. In addition, an application in the prescribed proforma should be submitted to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivity, is bound to follow all laws enacted by the Legislature ; the A. P. Act 30 of 1987 was enacted to regulate charitable institutions in the State ; while the said Act applies both to registered and unregistered charitable institutions, it requires all charitable institutions to be registered thereunder ; the Commissioner of Endowments has confirmed that educational institutions, though running on no profit basis, required registration under section 43 of the A. P. Act 30 of 1987 ; registration of charitable institution is obligatory in terms of section 44 ; the petitioners endeavour was to remain out of the purview of the various regulatory provisions of the A.P. Act 30 of 1987 ; and failure to register is not merely technical 21. A. P. Act 30 of 1987 (which repealed the earlier A. P. Act 17 of 1966) was enacted with a view to consolidate and amend the law relating to the administration and governance of charitable and hindu religious institutions and endowments in the State of Andhra Pradesh. This Act came into force with effect from May 23, 1987. Section 1(3)(a) thereof stipulates that the said Act is applicable to all public charitable institutions whether registered or n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 43(11) where any trustee or other person fails to apply for registration of a charitable institution, within the time specified, he shall be punishable with fine which may extend to one thousand rupees. Section 44 relates to the power of the Commissioner to have the institution registered and, thereunder, where any trustee or other person in charge of the management of a charitable institution fails to apply for registration of the institution, the Commissioner shall give notice to the trustee, or the other person, to make an application in that regard within a specified period and, if he fails to make such an application within the period specified, the Commissioner is empowered to have the charitable institution registered after following the prescribed procedure. 23. On a conjoint reading of the Explanation to section 1(3)(a), section 2(4) and 2(5) of A. P. Act 30 of 1987 it is evident that a society running an educational institution in the State of Andhra Pradesh is a public charitable institution. The submission that, in the absence of registration, the provisions of A. P. Act 30 of 1987 are not applicable is not tenable. The provisions of A. P. Act 30 of 1987 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... educational institution must exist solely for educational purposes. (Maharaja Sawai Mansinghji Museum Trust [1988] 169 ITR 379 (Raj)). The element of imparting education to students or the element of normal schooling where there are teachers and taught must be present so as to fall within the sweep of section 10(23C)(vi) of the Act. Such an institution may, incidentally, take up other activities for the benefit of students or in furtherance of their education. It may invest its funds or it may provide scholarships or other financial assistance which may be helpful to the students in pursuing their studies. Such incidental activities alone, in the absence of the actual activity of imparting education by normal schooling or normal conduct of classes, would not suffice for the purpose of qualifying the institution for the benefit of section 10(23C)(vi). (Sorabji Nusserwanji Parekh [1993] 201 ITR 939 (Guj)). Section 2(15) is wider in terms than section 10(23C)(vi) of the Act. If the assessee s case does not fall within section 2(15), it is difficult to put it in section 10(23C)(vi) of the Act. (Maharaja Sawai Mansinghji Museum Trust [1988] 169 ITR 379 (Raj)). As education falls wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not register themselves as charitable institutions under A. P. Act 30 of 1987. As noted hereinabove, whether or not a charitable institution is registered under the said Act, the provisions of A. P. Act 30 of 1987 are applicable to all public charitable institutions in the State of A.P. Further, while failure to register themselves under A. P. Act 30 of 1987 may attract the penal provisions therein, the said Act does not prohibit public charitable institutions from carrying on their activities even though they are not registered under the Act. Consequently, while the Chief Commissioner is bound to satisfy himself that the applicant is a charitable institution existing solely for the purposes of education, he is also entitled to prescribe registration, under A. P. Act 30 of 1987, within a specified period as a condition subject to which approval may be granted in as much as registration, as a charitable institution, under A.P. Act 30 of 1987 would be one of the factors to show that the society concerned exists for the charitable purpose of carrying on educational activities. 26. We, accordingly, hold that the certificate signed by the Commissioner of Endowments, as the appropr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the upliftment of socially, economically and educationally weaker sections of the society in general and of the Christian community in particular , and to meet all the above aims and objectives for the Christian minority community . In W. P. No. 21266 of 2010 the objects of the petitioner-society include to establish associate organiza- tions, such as orphanages, hostels for needy students, home for the aged and disabled, hospitals for the poor etc. 29. The objects in the aforesaid writ petitions were held by the prescribed authority as non-educational in nature. The amendments carried out during the financial year, and intimated to the Registrar thereafter, were held inapplicable for the financial year 2008-09, relevant to the assessment year 2009-10, for which approval was sought. 30. If there are several objects of a society some of which relate to education , and others which do not, and the trustees or the managers, in their discretion, are entitled to apply the income or property to any of those objects, the institution would not be eligible to be regarded as one existing solely for educational purposes, and no part of its income would be exempt from tax. In othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... morandum of the society shall not be valid unless such alteration is registered under the Act. Under section 8(4), if any alteration of the memorandum is filed, and if they are not contrary to the provisions of the Act, the Registrar shall register the same, and certify registration of such alteration within thirty days from the date of receipt of the resolution. This certificate is conclusive evidence that all the requirements of the Act, with respect to the alteration and the certification thereof, have been complied with and, henceforth, the memorandum, as so altered, shall be the memorandum of the society. On a conjoint reading of sub-sections (3) and (4) of section 8, it is only when the amendment to the objects of the society is intimated to the Registrar and the Registrar, on being satisfied that the amendment is not contrary to the provisions of the Act, registers and certifies such an alteration, would it be a valid alteration under the Act. It is only from the date the Registrar certifies the alteration that the amendment, to the objects of the society, comes into force. 33. The existence of an educational institution, solely for the purposes of education, is a pre-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e objects of the petitioner-society included to conduct seminars, symposiums, workshops and invite experts from India and abroad to improve the quality of education and to support students to elevate them- selves to international standards . This object was held not to be solely educational in nature. On a perusal of the receipts and payments account of the society, for the financial year 2007-08, the first respondent found that Rs. 50 lakhs was advanced to another society by name M/s. Jackson Educational Society. The first respondent held that the memorandum of association did not indicate that the aforesaid object was restricted only to the students of the educational institution run by the petitioner-society ; advance of Rs. 50,00,000 represented an interest-free temporary loan given to another society ; the funds of the society had, therefore, not been applied wholly and exclusively to the objects for which the society was established ; it was in violation of the third proviso to section 10(23C) of the Act ; and such diversion of funds could not be treated as application of income to the objects of the society as has been clarified under the twelfth proviso to section 10(23C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 2327 of 2010 the first respondent, on a perusal of the audited accounts of the petitioner-society, for the financial year 2008-09, found that Rs. 80,000 was claimed as rent paid to the secretary of the society ; such payment was also made to him during the financial year 2007-08 ; these payments partook of the nature of payments referred to in section 13(1)(c) of the Act ; and the certificate appended to the memorandum of association of the society, that the office bearers were not paid from the funds of the association, was false. 42. In W. P. No. 2331 of 2010 the first respondent, on a perusal of the audited accounts of the petitioner-society for the financial year 2008-09, relevant to the assessment year 2009-10, found that Rs. 1,08,000 was shown as rent paid to the secretary and correspondent of the society from out of the total rental expenditure of Rs. 2,82,000 ; similarly, during the financial year 2007-08, rent of Rs. 4,32,000 was paid to the secretary and other members of the society ; there was a drastic fall in rental expenditure during the financial year 2008-09 as compared to the expenditure under this head for the financial year 2007-08 ; no additions were sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al advance can be said to have benefited thereby. These objections do not find mention in the show-cause notices issued earlier by the first respondent. It is the petitioner s case that this objection was never put to them at any stage from the date of filing of the application till the date of its disposal ; had they been given an opportunity they would have explained that the rent paid by the society was much less than the prevailing market rate, and just because one of the recipients was a member of the society, such payment did not constitute any personal benefit to such member so as to be in violation of section 13(1)(c) of the Act. It is, therefore, evident that the petitioners have been denied the opportunity of establishing, before the prescribed authority, that the provisions of section 13(1)(c) are not attracted. Whether or not the amount paid as rent is more than the prevailing market rates is a matter which necessitates examination by the prescribed authority, after giving the petitioner-assessees an opportunity of being heard. It is made clear that in case the prescribed authority, after causing necessary enquiry in this regard, is satisfied that the provisions of sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the income or property of the institution is, or continues to be, lent to any person referred to in section 13(3) for any period during the previous year without either adequate security or adequate interest or both; (c) any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-section (3), out of the resources of the institution, for services rendered by that person to such institution, and the amount so paid is in excess of what may be reasonably paid for such services ; and (g) if any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in section 13(3). Under section 13(3)(cc) of the Act, the persons referred to in section 13(1)(c) include any trustee of the trust or manager of the institution. The amount given as interest-free advance was to the secretary of the society, (a person who falls within the ambit of section 13(3)(cc) of the Act), and since, on a conjoint reading of section 13(1)(a) with section 13(2)(a) and 13(2)(g) of the Act, a part of the income or property of the educational institution had been used for the benefit of such a person, i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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